Suppose the monetary-policy rule has the wrong natural rate of interest. That is, the central bank follows this rule:

where ρ′ does not equal r, the natural rate of interest in the goods demand equation. The rest of the dynamic AD –AS model is the same as in the chapter. Solve for the long-run equilibrium under this policy rule. Explain in words the intuition behind your solution.

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i = + p' + 0 ( ) + y(Y - Y,)